Financial Analysis for Managers Essay Example | Topics and Well Written Essays - 500 words

Financial Analysis for Managers - Essay Example Thus, companies often pay dividends in order to attract potential investors, retain current ones who are more sensitive to cash inflows from investment and indicate their strong financial muscle. In various studies, it has been apparent that declaration and payment of dividends bid up the price of the company's stock making the payment. Payment of dividends which is coupled by capital gains truly maximize the wealth of stockholders. Even if Microsoft is recognized because of its financial strength, the company can opt not to issue dividends. It should be noted that most investors are very much interested in acquiring ownership of this company because of its financial viability and brand equity. The continuous appreciation of its share in the market can suffice and dividends are not really necessary to complement this. It should also be noted that the business organization will only be shedding out million dollar funds which it can use to finance its R&D and provide more value to its stockholders. However, one of the detrimental effects of not issuing dividends will be the reaction of stockholders who feel more secure with steady cash inflow from their investments. It should be noted that the company can also undergo lawsuits for not paying its owners amidst its strong financial position. The tax treatment for dividends and capital gains often becomes a consideration of a business organization in its choice of dividend policy. In the United States, there has been a heated debate on the taxation of dividends. As both business organizations and investors receiving the dividend are taxed, double taxation together with the high tax rates has discouraged issuance of dividends. For example business organizations which report a pre-tax profit of $100 will be required to pay corporate tax of $35. The remaining $65 will also be taxed if the company will declare all of this as cash dividends.  Ã‚